Posted on 01/26/2010 8:16:22 AM PST by TheThinker
Big real estate developers do it all the time - like yesterday, when the owner of New York City's Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that's much bigger than your home is actually worth?
Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it's not just alright to walk away from one's over-sized mortgage -- it may actually be a moral imperative. (An earlier Times article, by Roger Lowenstein, said much the same thing.) After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It's just not fair to expect borrowers to follow rules that the lenders don't.
But why stop there? Some commentators are now calling on borrowers to start a mass mortgage strike.
"Remember burning draft cards? Burn your mortgage," the blog DailyKos told readers recently:
"The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that's what we must do. Doesn't have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment....just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced."
Now the call for a borrowers' revolt is being joined by folks who know an opportunity when they see it: real estate agents. Over the past month, agents have been rushing to declare 2010 "the year of the strategic default." Here's Connecticut Realtor Minna Reid:
Loan modifications do not address the real problem of heavy negative equity and are sure to fail most of the time. Even if the homeowner lowers their current payment they are left more trapped than ever. There will be no quick recovery this time. Years later when there is a need to HAVE TO move, the original problem of being upside down remains and the modified homeowner is left to short sell or foreclose once again.
Isn't it better to just cut the losses upfront ?
I know many will consider strategic default wrong or immoral, but as for me, I stopped passing judgment long ago.
Reid is far from the only real estate agent using mass revolt against the banks as a sales strategy. San Diego broker Bob Schwartz asks, "How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home's value will bounce back anytime soon.... Defaulting "strategically" can entice more walk-aways by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away."
And Phoenix agent Bob Stahl joins the chorus, assuring borrowers that a strategic default followed by a short sale won't hurt their ability to get a mortgage in the future.
Many of the agents calling for a mass movement of strategic defaulters specialize in short sales -- selling a home for less than the mortgage on it – something that mortgage servicers will often only consider once a borrower has begun to miss payments. It's ironic that after years of helping push prices up to maximize commissions, real estate agents are now pushing borrowers to dump their properties in short sales, so they can jump in and close a deal.
Still, they may be on to something.
Calling for mass strategic defaults is the equivalent of shouting "fire" in a crowded theater, prompting a stampede to the exits, and stampedes can leave a lot of people hurt – in this case, all the homeowners who live next door to the borrowers who stop paying, and suddenly see their property values plummet.
But there's also potential for millions of borrowers to gain if strategic defaults occur on a large scale. Nearly one in four borrowers nationally owes at least 20 percent more on mortgages than their home is actually worth, and in Nevada and Arionza it's more than half. The Wall Street Journal reports that about 1 million borrowers deliberately decided to stop paying their mortgages in 2009, or one in four of all mortgage defaults. When a critical mass of borrowers stops paying, it makes lenders – really, we're talking about the investors in mortgage-backed securities -- a whole lot more receptive to the idea of lowering the principal borrowers owe on their mortgages to persuade them that it's worth continuing to pay.
"People are spending far more on mortgage and ownership costs than they would to rent the same unit and there is almost no realistic prospect that there will ever get equity in many of these homes," says Dean Baker, co-director of the Center for Economic and Policy Research and author of the book False Profits: Recovering From the Bubble Economy. "Walking away will save them money and also free up money for consumption, thereby providing a boost to the economy. Banks will likely be far more forgiving of people who default in this crisis than they would ordinarily be. This isn't altruism -- they want to be able to make loans."
“...So why are you still writing a check every month on that mortgage that’s much bigger than your home is actually worth? ...”
Uh, because you promised (signed a contract) you would. Because you had the option to NOT buy a house with a usurious variable rate. Because maybe you shouldn’t have been thinking along the lines of an investment. Because too many people have bought houses and too few have bought homes.
ruefully
In my opinion, anyone that walks away when they have the ability to make their mortgage payment should be barred from getting any future credit. Barred for life.
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If you would like to be added to the “Live like no one else, so that you can LIVE like no one else” list, feel free to Freepmail me.
Uh huh. Another POS from Chicago, with my apologies to anyone from Chigago who thinks this guy is a POS too. Shame. Shame that people even consider this in this light. On Free Republic, even.
If you have no money and cannot make ends meet, that is one thing. You do what you must.
But if you still have your 60" Sony, your five cell phones for everyone in your family, still drive the new $50,000 BMW and your spouse with the new car, then it is immoral to walk away from your obligations.
A-holes like this guy say that if it is financially advantageous, do it.
Scum. And in my opinion, everyone who agrees with him is as well.
When contracts mean nothing, then we are finished.
The two parties have a contractual arrangement: the party of the first part has the option to either pay X amount to the party of the second part each month, or to surrender possession of a building. As circumstances change, the latter option may become preferable to the former. It's a business decision, nothing more, nothing less.
But MY point is that I have the needed funds to pay everything off if I could access my money. The government regs are so restrictive and confusing (I asked 4 different administrators about how to do this and got 4 different answers.) If the Tax Nazis would just let go I would be able to pay everybody -- including them. They just refuse to let go of anything.
I contend that if they just got out of the way and let people have their own money these mortgages and other debts would be paid.
As someone posted yes but the question is will the bank even bother trying to go after you considering the legal and other costs.
There is nothing moral about being a chump. When the banks and our own elected politicians set about shafting americans every way they can it makes more sense to do whatever you must to protect yourself and your family. It’s not about morality.
lets play connect the dots.....one of the main tenets of the communist manifesto is the elimination of the ownership of private property.....banks own the houses, government owns the banks....anyone care to connect the dots?
There is nothing moral about being a chump. When the banks and our own elected politicians set about shafting americans every way they can it makes more sense to do whatever you must to protect yourself and your family. It’s not about morality.
I wonder how loud this POS would scream if his boss should decide he had no "moral obligation" to pay has contracted salary?
Nonsense.
The bottom line of any mortgage instrument (by definition) is: The party of the first part receives a loan of such-and-such amount from the party of the second part. The party of the first part offers a certain building as security for that loan. Ergo, the risk that the certain building will lose value is inherently assumed by the party of the second part (barring the special case of the value loss being directly caused by the party of the first part's actions).
You really need to listen to Dave Ramsey. His advice would be very helpful for you. Remember, by cashing in your 401K you will have to pay the income tax, plus a penalty. Usually, that means you will lose 40% of the balance.
Good point but for one thing. The government owns the money not the banks. Once you grasp that the government sees all money as theirs alone and any that you are allowed to use a small bit of it only by their good graces then you can see everything from their point of view.
Today Moses would be standing before the IRS director and be pleading "Let my people's money go!"
35.3% actually, and this is on the advice of the tax attorney that is bringing the case to the IRS. They will be giving it back with interest.
The most famous formulation of contract law is this: “a contract is the duty to perform or pay damages.”
You ALWAYS have that choice and anyone who performs at higher cost than their damages if they breach is, quite frankly, an idiot. If a corporate manager performs a contract which is cheaper for the company to breach, he actually violates his fiduciary duty to his shareholders.
The reason why this is rarely an issue is that well-drafted contracts will provide for high damages, and well-functioning markets will penalize you severely in denial of future customer / counterparty credit if you avail yourself of breach (i.e., another measure of damages). If banks systemically violated this basic risk-management precept, that’s their fault.
The “second wrong” in two wrongs don’t make right here is for a borrower to keep performing in the absence of any duty to do so, thus being as stupid now as his lender was to loan to him in the first place.
Something better give...Unemployment reaching the highest levels in years and no end in sight..This only took a year for 0 to accomplish...If he goes another 3 years can you imagine the mass exodus of the unemployed walking away from their homes? *shiver*
“Because too many people have bought houses and too few have bought homes.”
I bought a house, but when I got a dog it became a home. The great Mocha Girl Dog (MGD) died suddenly in December and now all I have is a house. ;-)
Seriously, I did buy a house I could afford, took on a 15 yr fixed with affordable payments. I have been working Dave Ramsey’s TTMM for almost 3 years and now I have a mortgage balance that is well below the reduced value of my house. I am 100% against anyone, who can afford the payment, to walk away from their mortgage.
Here is a conversation I would like to see:
AUTHOR OF ECONOMICS BOOK: “Dick, I know that I contracted with you to provide me with 200 hours of consultation on economic matters, which you agreed to do contractually with 10% up front, which I have paid.”
RICHARD THALER: “Yeah? So, I know that we shook hands, and I signed the contract too. So what is the deal? I have already given you 200 hours of my time. When do I get the rest?”
AUTHOR OF ECONOMICS BOOK: “Well, here’s the thing, Dick. I need to use that money I owe you for something more important to me. My retirement account hasn’t been building up quickly enough, and my wife needs that new kitchen put in. She still has those old turquoise appliances from the Fifties in there.”
RICHARD THALER: “But, I put in my time! We signed the contract! You OWE me! The contract stated that if you didn’t meet your obligations, I could legally get any profits from the book to make it up! I’m gonna take every cent of profit right off the top...”
AUTHOR OF ECONOMICS BOOK: “Well, I’m not gonna finish the book. You can have it.”
RICHARD THALER: “But...but...”
AUTHOR OF ECONOMICS BOOK: Gotta go. My kid is calling me on his new iPhone. We all got em...great stuff, especially if you get the unlimited plan and the new top end models with 80GB, which we had to get...can’t scrimp THERE! Even though they cost $700 each, that was important to my wife and four kids, just as important as those high end sneakers they wear...”
“Socialization usually thrives when a vacuum is created by crisis”
I would not single out socialism only.
In a crisis as you describe, ‘despotism’ with what are locally considered extreme measures by any name thrives. A good example is weinmar germany - one the one hand you have the communists, the other, the nsdaq (fascists), actively fighting it out. In that case, the fascists won, but I am not sure how different living in stalinist russia and mid-30s germany was to the tax serf.
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